RTX Corporation

Good day, ladies and gentlemen, and welcome to the Raytheon Technologies third quarter 2020 earnings conference call. My name is Joelle, and I'll be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chief Executive Officer, Toby O'Brien, Chief Financial Officer, and Neil Mitchell, Corporate Vice President, Financial Planning and Analysis and Investor Relations. This call is being carried live on the internet, and there's a presentation available for download from Raytheon Technologies website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding net non-recurring and or significant items, and acquisition accounting adjustments, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risk and uncertainties. RTC's SEC filings, including its forms 8K, 10Q, and 10K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, We ask that you limit your first round to one question per caller to give everyone the opportunity to participate. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Hayes.

Okay, thank you, Joellen. Good morning, everyone. For those of you following along, we're on slide two of the webcast. Let's just spend a minute talking a little bit about the current environment. We've now passed the six-month mark as Raytheon Technologies, and I will tell you, I'm proud of the job the team has done with the integration, despite the fact that most of the work has to be done remotely. We obviously continue to operate in the midst of one of the most difficult times the industry has seen, but we remain focused on delivering for our customers and protecting the health and safety of our people. Through the pandemic, we continue to invest in technology and innovation that's going to drive long-term growth. while also maintaining a disciplined approach to capital allocation and implementing tough but necessary cost reductions, including some structural cost actions that we'll talk about later. Notwithstanding that environment, we delivered solid results in the quarter, and we're pleased with the progress we've made with our merger integration and the decisive actions that will position us to emerge from the pandemic in a position of strength. Sales for the core were in line with expectations, and adjusted EPS and free cash flow were better than expected. In fact, free cash flow was significantly better than expected at about $1.2 billion. On the defense side, backlog remains robust, over $70 billion. We've had exceptional bookings this year, and we expect both of our RIS and RMD businesses to end 2020 with record backlog. At the same time, we continue to focus on what we can control. Let me give you just a quick update on our cost actions and our cash actions, as well as some of the merger integration and synergies. And while we're firing on all cylinders across a number of fronts, we're always looking to where we can do more. On the cost side, so earlier this year, we've implemented cost reductions that gave us about a $700 million benefit in the quarter. Even more importantly, we took cash conservation actions that saved us $1.9 billion in the quarter. Both of these are ahead of what we communicated last quarter, and we remain confident that we'll realize the full benefit of all of these actions by year end. I'll go into more detail on the next slide. Regarding the merger, our cost and revenue synergy activities are progressing quite well. The team is working nearly 550 synergy projects. During the quarter, we achieved about 65 million in gross cost synergies, bringing us over to 100 million in the first six months. And we now see about 225 million of gross synergies this year, up from our early estimate of 200 million. We remain confident that we'll achieve at least a billion in gross run rate cost synergies by 2024. On the Rockwell Collins side, Collins Aerospace synergy activities also continue. We achieved another $40 million of synergies in this quarter, which brings us over $130 million year to date and over $430 million since the deal closed in November of 2018. And we're quickly approaching our $600 million synergy target. And we remain on track to reach at least another $150 million for this year. And these are in addition to the $225 million of gross RTX synergies this year. On the revenue synergy front, we continue to see significant opportunities to leverage our collective technologies to drive incremental growth, and we're progressing here as you would expect. And finally, a couple of comments on some recent divestitures. We recently completed the divestitures of Collins Military GPS and Space ISR business, which resulted in net proceeds of about $2 billion, further supporting our strong liquidity position and contributing to the $10 billion of cash that we have on hand at the end of the quarter. You also saw the announcement yesterday that we reached an agreement to sell our Forcepoint business. We expect that deal to close in the next three to four months, and gross proceeds from that transaction should be about $1.5 billion. Again, great cash position, great liquidity. Okay, let's talk a little bit about cost. Slide three. Maybe first on the market. So on the commercial air front, our view remains unchanged. We don't expect commercial air traffic to return to 2019 levels until at least 2023. And that's, of course, depending upon the timing of a widely distributed vaccine. In the near term, we expect a gradual recovery of commercial air traffic, particularly given the recent spike in global cases. So here's an update about what we're doing about it. As you know, we set aggressive targets in the first quarter to reduce costs by about $2 billion and to take actions to conserve about $4 billion of cash. We're taking the difficult but necessary actions to reduce headcount at both Collins and Pratt. We'll reduce about 20% of our commercial arrow headcount. That's about 15,000 positions. We're also taking out about 4,000 contractors. These are primarily engineering contractors, so a total reduction of roughly 19,000 folks. Then, of course, on top of that, there's another 1,000 folks that will be leaving as a result of the merger synergies, and that's mostly corporate. So about 20,000 positions have been eliminated. Just maybe on the opposite side of that though, in our defense businesses, we are hiring in targeted areas to support the growing businesses, primarily on the engineering front. Importantly, we're also actively seeking out additional structural cost reduction opportunities. We are turning our attention towards ensuring we optimize our footprint, accelerate transitions from high to low cost locations, and permanently reduce overhead costs. One example I've shared, I've challenged the team to think very differently about how we work in the future. And when we came together as RTX, our original goal was to reduce and consolidate office space by about 10%, or about 3 million square feet. I now think we could see upwards of 20% to 25% reduction in square footage. That's going to be a huge savings. Additionally, last week, Pratt announced a new vertically integrated, highly automated turbine airfoil production facility to fulfill future GTF and F-135 demand. That facility will be located in Asheville, North Carolina. This is going to be a greenfield facility that will modernize and transform Pratt's operations with cutting-edge technology while significantly reducing structural costs and enabling operational efficiencies through automation, value stream, co-location, and best-in-class lean processes. Once fully operational, we expect to receive annual run rate savings of about $175 million from this investment. These are just a couple examples of the structural actions we're taking to position ourselves for long-term success. Additional projects are also under evaluation, so we're not done yet. At the same time, we're not losing sight of execution across our business. Let me give you a couple of examples. First, we're shifting some of the production of our circuit cards from our Andover, Massachusetts facility to Collins Aerospace's Circuit Card Center of Excellence in Coralville, Iowa. This allows us to better meet our customer commitments at a lower cost and balances demand between our facilities. Secondly, we're strategically utilizing available shop capacity to upgrade the GTF fleet to the latest configuration to ensure our customers' fleets are healthy and well-positioned as we exit the year and demand slowly returns. So overall, despite near-term uncertainty on the commercial aero side, I'm very confident in the long-term growth potential of the company. Our defense portfolio is resilient with businesses that are aligned with the U.S. National Defense Strategy and focus on higher growth, higher technology areas. And the long-term fundamentals of the commercial aerospace remain intact. We have unique advantages as a result of the merger, and I'm confident we'll be able to drive significant value for our customers and our shareholders. So with that, let me turn it over to Toby to take you through the financial results in a little bit more detail. Toby?

Okay, thanks, Greg. I'm on slide four. While commercial arrow headwinds persisted in Q3, our performance was generally better than we had expected. Adjusted sales were $15 billion, up about $400 million sequentially over Q2, including the stub period. Adjusted EPS was $0.58, better than our expectations, driven by acceleration of our cost mitigation actions and continued strength of military volume at Pratt & Collins. A lower effective tax rate in the quarter also contributed to a few cents of improvement. On a GAAP basis, EPS from continuing operations was 10 cents per share, down year over year, and included 48 cents of net non-recurring and or significant items and acquisition accounting adjustments. This includes a net gain on dispositions of 17 cents per share, which was more than offset by 27 cents of acquisition accounting adjustments, primarily related to intangible amortization, 26 cents related to charges due to the current economic environment driven by the COVID-19 pandemic, and 12 cents of restructuring. Free cash flow of $1.2 billion was better than expected and included about $600 million of merger costs, restructuring, and tax payments on divestitures. The better-than-expected cash flow was driven primarily by the timing of collections at RMD, as well as in our commercial aero businesses, and accelerated realization of our cash conservation actions, including inventory reductions at Collins. Moving to slide five, let me share with you a few data points that demonstrate the resiliency of our portfolio. Bookings at RIS and RMD have been exceptionally strong over the last year, as demonstrated by the trailing 12-month book-to-bill ratios, where both businesses are well above one, positioning us for continued growth across our franchises, both domestically and internationally. About 40% of the backlog at these businesses is for international customers. And military sales growth at Collins and Pratt continues to be very strong, with organic sales growing 8% and 11% in the quarter, and that's on top of 10% and 13%, respectively, in the first half of the year. On the commercial aero side, we saw modest improvements in aircraft utilization across the fleets powered by Pratt's GTF and V2500 engines. While certainly down considerably from prior year levels, it's encouraging to see a large number of our engines in active service. The commercial aero recovery clearly still has a long way to go, but we are well positioned to capture improvements in utilization of the world's narrow body fleets, in addition to the continued strength of our defense businesses. With that, I'll hand it over to Neil to take you through the segment results, And I'll come back and share a bit more perspective on the rest of the year. Neil? Thanks, Toby.